A recession should lead to wider spreads – but ABS spreads fell for second consecutive straight week.
Weekly asset-backed securities (ABS) spreads have posted a slight retreat for the second week in a row, despite additional hawkish moves by the Federal Reserve and contracting gross domestic product (GDP) for the second straight quarter. Spreads on the A-tranche for prime fixed-rate auto securities over swaps this week ticked down 3 basis points (bps) on a linked-week basis, according to securitization data released today by JPMorgan Securities. Last Friday, spreads dipped 7 bps on a linked-week basis following five straight weeks of expansion.
While these are not major shifts in funding costs, it’s a curious trend, in Auto Finance News’ estimation. Increases to the Fed’s benchmark interest rate to combat inflation have historically sent the U.S. economy into a recession. Not to mention GDP contracted in Q2 for the second straight quarter, another widely regarded mile marker of a looming recession.
With a recession comes additional risk, suggesting spreads should be widening — not tightening — amid increasing signs of a forthcoming downturn. So, what could be behind the recent retreat?
Spreads had been widening from June to mid-July largely due to macro-economic pressures, Elen Callahan, managing director and head of research at the Structured Finance Association (SFA), told Auto Finance News.
“We’re looking at rising rates. The inflation is now at a 41-year high, and that is weighing very, very heavily on the space,” Callahan said.
At SFVegas 2022, SFA’s annual conference that was held July 17–20, inflation was top of mind during panel discussions and conversations, she said.
Inflation “is definitely a concern for consumers, because it’s going to impact their ability to service their debt,” Callahan said.
It would seem, then, that tightening of spreads over the last two weeks would suggest that investors are feeling more optimistic as it relates to macroeconomic pressures and the Federal Reserve’s ability to manage unbridled inflation without swinging the U.S. economy into a deep recession.
Equity markets seems to point to increased investor optimism as we close out the week. The Dow Jones Industrial Average is pacing to close the week up 950 points or 3%, and the tech-heavy Nasdaq is set to close the week up 580 points, or 4.9%.
To be fair, funding prices have shifted greatly in recent months. Whether these last two weeks make a trend remains to be seen.
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